Supplier Financing for Companies that Sell to Retailers

Getting a contract from a large retailer can be very exciting for any business owner. It can certainly be a defining moment in your career – if you are prepared for it. But large contracts can also be a double-edged sword that can hurt a business that is not well prepared. They can tie up your resources, preventing you from servicing other orders – or other clients.

From this article, you will learn:

  1. Common financial challenges of working with large retailers
  2. Why merchandise and service transactions are funded differently
  3. Four supply chain financing options to grow your business

Large retailers usually pay slowly

One of the major challenges of becoming part of the supply chain of a large retailer is that they often pay their invoices in 30 to 90 days. Suppliers must offer sales terms to large retailers as a condition of doing business with them. Large retailers like getting terms because it improves their cash flow. They get to sell your merchandise (or use your services) for a few months before having to pay for them. It’s similar to an interest-free loan.

This challenge creates a problem for small and midsize businesses because they have to cover all of their expenses while waiting for invoices to pay. Many companies can’t afford to do that without compromising their ability to pay their own expenses.

In some cases, the retailer may pay you quickly, but often in exchange for an early payment discount. However, if that doesn’t work, then your company must use supply chain financing to cover operations.

Merchandise vs. service sales

Companies that sell services usually have a single problem. They need funding to keep up with payroll while waiting for client payments. Companies that sell merchandise are part of a supply chain that faces a more complex dilemma. They have the problem of dealing with slow payments. However, they also have to deal with the effect of large orders.

Large orders can be challenging if you are not prepared for them. You must have enough resources to pay your suppliers. Some of these suppliers may demand an upfront deposit, further affecting your cash flow.

Even if you have the funds to cover a large order, your company may not have funds to cover additional orders until the first order has been paid. This challenge can create serious constraints. However, you can solve these issues and grow the business if you use the right supply chain financing solution.

Supply chain financing alternatives

Supplier chain financing is designed to help companies manage their cash flow problems and grow the business. When used correctly, this solution can provide funds to cover company expenses and to handle larger orders. In this section, we discuss four supply chain financing solutions:

a) Invoice factoring

Invoice factoring can help your company if your main challenge is that you are waiting 30 to 60 days to get paid by the retailer, and you need to get paid sooner. By allowing you to finance your invoices, factoring provides immediate cash flow.

Invoices are usually financed in two installment payments. The first installment covers 85% of the invoice and is advanced as soon as the retailer receives your product or service. The remaining 15%, less fees, is advanced once the retailer pays the invoice in full. Factoring is easier to get than conventional financing and offers great flexibility. The size of the line can increase as your qualified sales to retailers grow. Learn more about invoice factoring.

b) Purchase order financing

Purchase order financing can help companies that are selling merchandise to large retailers. Note that purchase order financing cannot be used by manufacturing companies themselves.

Purchase order funding helps you pay for vendor costs associated with large orders. This solution allows your suppliers to manufacture and deliver the goods and allows your company to fulfill the order. Purchase order financing can be used only by companies that:

  • Use a single supplier to manufacture their product
  • Have gross margins of 20% or more
  • Have orders of at least $100,000
  • Have a specific order that needs funding

Learn more about purchase order funding and how it works.

c) Supplier financing

Supplier financing, an alternative to purchase order financing, is used by manufacturing companies and product distributors alike. This solution provides you with raw materials and/or finished products so you can fulfill large orders or build inventory.

Supplier financing can be used to complement your existing financing. It does not (usually) require your lender to provide a subordination. It is available to companies that:

  • Manufacture or distribute goods
  • Have minimum annual sales of $2,000,000
  • Have a minimum of three years of operation
  • Can be credit insured

Learn more about supplier financing and if you qualify for it.

d) Asset-based lending

Asset-based financing is an intermediary solution offered to companies that have outgrown their invoice factoring facility but do not yet qualify for a business line of credit. The lending structure is designed to fit the assets that are being funded. Accounts receivable and inventory are funded using a revolving line of credit structure. Equipment and other assets are usually financed with a term-loan structure. Learn more about asset-based financing.

Guaranteed sales clauses

Keep in mind that some contracts have a guaranteed sales clause. This type of clause gives the retailer the option to return any unsold product to you – usually in the form of a chargeback. This clause impacts your chances of getting funded because factoring and purchase order financing solutions use accounts receivable as their main collateral. However, guaranteed sales clauses do not necessarily impact your ability to get supplier financing.

Supply chain financing works with quality retailers

These financing tools can work with most quality retailers, including the suppliers of great retail brands such as:

Looking for a financing quote?

Working with large retailers and need funding? We are a leading provider of factoring, purchase order funding, supplier financing, and asset-based financing. For a quote, fill out this form or call (877) 300 3258.


Disclaimer: Note that we are not affiliated and do not represent any of the brands listed in this article (including: Costco, Dollar Tree, Bed Bath &Beyond, TJ Maxx, The Home Depot, and Walmart). This article is provided for informational purposes only. If you need business or financial advice, consult a professional.